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June 18, 2013

AdvisorOne’s Best Comments: Goldfarb, Fiduciary, Referrals

Our regular collection of some of the most recent—and most thought-provoking—comments made by readers on AdvisorOne

The comments section on any site can be engaging, annoying, puzzling, insulting—likely many more adjectives could apply.

But the best comments can help continue the conversation of any story or blog for our readers—and for us—beyond the article’s own words. So AdvisorOne will be regularly highlighting some of the better comments that are posted to keep the conversation alive. The comments weren’t highlighted because they were long or short, just, hopefully, thought-provoking.

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Bob, an excellent article on a confusing case. Due to the confidentiality of CFP Board disciplinary proceedings, we are never likely to obtain a full knowledge of the facts, even in summary form, as they were presented at the CFP Board hearing. Accepting Alan Goldfarb's statements as both true and complete (which I do, for he has long been a man of honor and a leader of the profession), I remain perplexed about two aspects of the CFP Board's ruling to (1) find that a violation occurred; and (2) impose the draconian penalty of a public sanction.

FIRST, there does not appear to be any explanation of the term "salary" on the CFP Board's web site. I receive a salary from my fee-only investment advisory firm; can I use the term "salary"? Or, since all compensation DERIVES from either fee compensation (i.e., paid directly by the client) or commission-based compensation, should all advisors describe themselves as either "fee-only" or "fee-and-commission" or "commission-and-fee" or "commission-only" on the CFP Board's web site? In other words, who - if anyone - is permitted to utilize the term "salary"? Given such, is the misunderstanding that occurred not the fault of Mr. Goldfarb, but rather the fault of the CFP Board? And ... would not others have been caught in the trap of this ambiguity - and what happened to their cases?

SECOND, why a public sanction for such the alleged seemingly minor transgression - if it was a transgression at all? It seems that other disclosures provided by Alan Goldfarb and his firm corrected any misunderstanding any client or potential client would possess - if indeed there was any violation at all, and if indeed any client or potential client was confused by the language found on the CFP Board's web site. Alan Goldfarb was apparently thorough and prompt in his reply to the CFP Board. Moreover, Alan Goldfarb very publicly resigned his CFP Board Chairmanship in order to preserve the reputation of the CFP Board while this investigation was pending. In other words, there does not appear to be any harm to Alan Goldfarb's clients, nor to the public. And Mr. Goldfarb, by his very public resignation last year, already burdened himself with public discussion of the situation. Are the CFP Board's disciplinary guidelines, as to sanctions imposed for the alleged offense, so uncompromisingly rigid that a public sanction was warranted (even assuming, again, that a transgression of the CFP Board's rules even occurred)? You characterize the case as "curious." I would go further, and say that the CFP Board's decision in this matter poses a grave concern.

At the minimum, and without reference to any particular case before it (now or in the past), the CFP Board should adequately and prominently define for its Certificants the term "salary" and specify the circumstances in which it can be utilized (and when it cannot). Even then, any retrospective application of such an explanation appears unjust and a denial of due process - not only for Alan Goldfarb, but also for any other persons trapped by the ambiguity which has been so created by the CFP Board.

Bob, your old pal Mary Malgoire here. Excellent article... I would like to clarify one thing about NAPFA's standards for admission. We recognize that some fee-only advisors are indeed salaried professionals in a stand-alone business unit that is owned by a commission-based firm. Since there could be expectations, even incentives, to refer business to the "product side" of the house. NAPFA requires a signed statement from the salaried individual's supervisor that said professional has NO obligation to recommend the subsidiaries products and may recommend ANY product that is suitable for the client. In some situations the applicant's supervisor refuses to sign such a statement. That tells you something!

So my quesiton here is whether or not Mr. Goldfarb was under any obligation to satisfy client product needs via the firm's subsidiaries? The ADV Part 2 also helps NAPFA to understand and can enlighten. I too hope the CFP Board and other professional associations will clarify these issues as my own investigation indicates that there are many professionals associated with commission and fee firms who claim "fee-only" on "find a planner' searches. If the firm's website lists a broker-dealer affiliation, it is a misrepresentation to the public to list yourself as fee-only? My solution to all of this, as I said at the Fiduciary Summit yesterday, is to simply require dislcosure of the adviser's (and advisory firm's) actual $ financial interest and let the marketplace work it's magic.

3. Will Indexing Kill the Market?: In his May column for Research magazine, published on AdvisorOne on April 29, 2013, Marshall Jaffe wrote: “Yet hidden in the shadows of indexing’s monumental success is a growing body of evidence that this truly elegant idea not only has the potential to threaten the stability of the market, but has already changed market behavior in ways few if any investors understand.”

Comment by Anonymous (James McRitchie)

Submitted on 6/13/2013 at 16:22

The larger problem with indexed funds is that they have little if any incentive to actually monitor management since they compete with other indexed funds on the basis of low fees. Any benefit that occurs because of their active monitoring goes equally to their competitors, but every dime they spend is only their own expense. We have reached the point that a majority or close to a majority of stock in most large companies is held by indexed funds. The result is that either they defer to management (which I suspect is most frequently the case) or they defer to ISS and Glass Lewis. Either way is problematic. I discuss this more thoroughly in a three part post, beginning with "Agency Capitalism: Corrective Measures (Part 1)." My post includes suggested solutions, including proxy advisor contests, which will allow much more time and analysis than the estimated average of $2,000 per proxy spent by ISS.

4. What a Pretzel Entrepreneur, a Navy Widow and an Ex-Rep All Need From Their AdvisorsInvestment Advisor Editor-in-Chief John Sullivan wrote this news piece on June 14, 2013, from the TD Ameritrade Institutional Elite Advisor’s conference, reporting on a consumer panel moderated by Barbara Roper of the Consumer Federation of America. “The panel, convened to discuss consumer awareness of the concept of fiduciary, quickly deviated into other issues, as panelists agreed that acting in their best interest was important even if they never heard the term ‘fiduciary’ used in that context.”

Comment by Anonymous

Submitted on 6/14/2013 at 11:01

What was the point of the article? Has anyone asked the CFPBOS [the CFP Board of Standards] why for decades they actively fought the imposition of a fiduciary standard? If it was core to the practice then it would have been embraced at the onset.

5. 5 Tips for a Successful Referral Request: In this article by Paul McCord, originally published June 13, 2013, on AdvisorOne’s sister publication LifeHealthPro, the author wrote, “Let’s take a look at the primary problems the traditional referral 'method' creates.”

Comment by Stephen Wershing, CFP

Paul, a lot of good points. One key is understanding why people make referrals. We all engage in referral behavior all the time, and it is because we get rewards for it. Advisors do not widely understand this, and so they think we have to pry them out of clients, totally disrespecting why the client would do it and actually helping prevent future referrals. Also, as you point out, clients do not generally understand who to refer. Addressing these issues, like I do on my blog , The Client-Driven Practice, and other places, you can get people referring -- without asking! There is also more about this in the interview I did with Investment Advisor magazine last August: How to Succeed at Referrals (Without Even Asking).